As economic confidence grows, merger and acquisition (M&A) activity is expected to grow in Monmouth County and throughout New Jersey. Nonetheless, joining two companies is not an easy task. Mergers and acquisitions are among the most complex corporate transactions.

In addition to the complexity of negotiating the terms of an agreement, including the determination of the most tax-efficient structure for the transaction, M&A transactions are also subject to regulatory scrutiny.

Mergers and acquisitions involve unique business activities

To help navigate these sophisticated transactions, New Jersey companies should seek the assistance of business lawyers experienced in mergers and acquisitions. They can often structure a deal to minimize regulatory scrutiny while still meeting the needs of the parties.

While M&A are often lumped together, they involve distinct business activities. In a merger, two companies join to form a single company. Although there are many possible combinations, the most common types include the following:

  • Vertical: Two companies from different levels of the supply chain combine to improve efficiency and cut costs. Examples include America Online Inc. and Time Warner Inc.
  • Horizontal: Direct competitors that operate in the same industry and often offer the same goods and services merge to obtain a larger market share. Examples include Daimler-Benz AG and Chrysler Corp.
  • Conglomerate: Companies with no common business activities unite to spread the reach of the newly formed entity. Examples include Procter & Gamble Co. and Gillette Co.

While M&A are often lumped together, they involve distinct business activities.

In an acquisition, one company acquires the assets or stock (or other equity interests) of another company. In a transaction involving the acquisition of substantially all of the assets of a target company, the target company thereafter will cease to exist as an operating company and will often be dissolved and liquidated.

Subsidiary acquisitions

In a transaction involving the acquisition of the outstanding stock or other equity interests of the target company from its equity owners, the target company will become a subsidiary of the acquiring company. These acquisitions largely fall into one of two categories:

  • Friendly: The management and board of directors of the target company approve the terms of the buyout, which may involve the payment of stock and/or cash. While management may sign off, the target company’s shareholders and regulators must also generally approve the deal.
  • Hostile: The target company’s management resists the acquisition. To effect the transaction, the acquirer must directly gain the approval of the shareholders or replace the existing board of directors. These battles can be protracted and costly for both sides.

Mergers and acquisitions face regulatory hurdles

Because M&A can directly impact competition, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) regularly review proposed or consummated transactions. The agencies can prohibit anticompetitive transactions under a number of antitrust laws, including the Sherman Anti-Trust Act and the Clayton Anti-Trust Act.

Because horizontal M&A involve direct competitors, they often receive the most intense scrutiny. In accordance with their Horizontal Merger Guidelines, the DOJ and FTC will specifically look for evidence of anticompetitive effects, including post-acquisition price increases, market share concentration or other changes adverse to customers.